On September 21st the Bank of Japan (BOJ) pledged to hold the 10 year Japanese Government Bond (JGB) to below 0%. That announcement was met with excitement by global markets as reported in the WSJ here as just one example.
Rather than buying a preset amount of Japanese Government Bonds each month (as they had been doing under their Quantitative Easing program) they simply set what many market participants viewed as a ceiling on the 10 year JGB at 0%. That helped suppress global bond market volatility as I highlighted here in October (the Scariest Chart for Bond Investors). That complacency helped set up conditions that have helped push global bond yields higher - along with some help from the Trump effect and the ability of OPEC to prop up oil prices.
In spite of the pledge, bond yields in Japan have increased and are now at almost 0.1%, the highest yield since February of this year. While 0.1% might not seem like much of a failure, it could have serious repercussions for global bond yields
- The inability to keep the peg could be construed by markets as a sign that Central Banks are losing the ability to control markets. Whether it is an inability to support markets or an unwillingness to support markets - the failure of the BOJ to keep their peg could be problematic from a 'signalling' point of view. It isn't too late for the BOJ to correct this problem, but as they allow yields to creep higher, expect markets across the globe to question the mindset of Central Banks.
- Many Japanese investors were forced to find alternative ways to get yield when JGB's were below zero. Some of that money flowed into overseas debt markets - Treasuries and Investment Grade bonds benefited. As JGB rates increase above 0% look for more investors to remain content with onshore investments, reducing the flow of money in the U.S. bond market.
Right now the move in JGB's is only mildly disturbing, but if it continues I think it could act as yet another shock for bond yields globally.
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